How trusts provide a straightforward way for families to protect and pass on their wealth
For many, the word ‘trust’ can have a slightly Dickensian ring to it; people often assume that a trust is rather old-fashioned, difficult to set up and complex to run. In addition, there is a common misconception that they are established purely for tax purposes and don’t have any other role to play.
However, that’s not the case. Today, trusts are a widely-used financial planning tool that allow people to hand over the management of their assets to one or more trustees who hold them for the benefit of one or more beneficiaries. A trust can be used to fulfil a variety of aims, including helping to protect the family home and other assets for the benefit of future generations.
What is a trust?
A trust is a legal arrangement which allows assets, usually property, money or investments, to be looked after by a trustee for beneficiaries, who can be named individuals such as your children, grandchildren, other family members and loved ones, or charities.
A trust can protect your assets during your lifetime, and continue to do so once you’ve passed away, or can be set up under the terms of your Will, therefore only coming into effect on death. The details of the trust are set out in a document referred to as the trust deed.
There are three commonly-used terms associated with a trust:
• The settlor – the individual or individuals who own the assets and want to place them in trust
• The trustee – the person or organisation who takes on responsibility for managing the assets placed in the trust by the settlor
• The beneficiary or beneficiaries who will benefit from the trust by receiving the assets, or income generated by the assets.
Why set up a trust?
They can have a variety of uses such as:
• Making sure that income and capital is used in a planned and protected way
• Safeguarding the financial interests of a young beneficiary by retaining control of the assets until they reach the age of 18
• Looking after the interests of a child or adult who can’t handle their own financial affairs through incapacity
• Providing income for a husband or wife, while keeping the assets intact for the benefit of children
• Reducing Inheritance Tax liability (IHT) by taking assets out of an estate, thereby reducing the amount on which IHT might otherwise be payable
• Protecting assets on marriage, divorce and remarriage
• Providing for both a current spouse and children from a previous relationship
• Preventing the family home from being sold to pay for residential care
• Ensuring that the proceeds from a life insurance policy go to the beneficiary without waiting for probate, and don’t form part of the estate for IHT purposes
• Prevent an inheritance from affecting someone’s entitlement to state benefits.
Setting up a trust
There are several types of trust some created under a Will, others that can be established at any time. The choice will depend on who the beneficiaries are, what the assets are, and how and when you want them distributed. We can provide expert advice on the type of trust that is most suitable for your particular circumstances.
In our next post, we’ll look at various scenarios where trusts can play a part in fulfilling a family’s objectives for their wealth across the generations.